March 2014 - A Fresh Look at Income Imputation

by Commissioner Richard G. Vogl

To impute income or not? That is the question.

What do you do when a person obligated to pay child support comes into court and says that they lost their job? What if the termination was voluntary? What if the termination occurred after the payor remarried and the new spouse is a high wage earner? Does that make a difference?

In the history of family law, a court could consider a party’s earning “capacity.” See In re Philbin, 19 Cal. App. 3d 115 (1971); In re Nolte, 191 Cal. App. 3d 966 (1987). The more common consideration now goes to “imputed income.” See In re Hinman, 55 Cal. App. 4th 988 (1997).

Inspired by a 2013 ruling from the Fourth Appellate District, Division 3, In re Ficke, 217 Cal. App. 4th 10 (2013) which, in part, concerned the issue of imputation of income, this article revisits that important issue.

The law is clear that “income” is defined in Family Code section 4901 and is basically the gain or recurrent benefit derived from labor, business, property, or from any other investment of capital. See In re Rothrock, 159 Cal. App. 4th 233 (2008). The court typically makes financial orders from whatever sum the court has found to be appropriate. But when may the court impute an income to a party who argues that they have none, or have only limited income?

In Ficke, the trial court found that the income of the father was over $8,000 monthly. The mother had been offered a job paying over $13,000 monthly, but had not taken that job. Prior to the job offer, she had started a new enterprise (a pet healthcare membership insurance program) which would allow her to be home evenings with the two children of the parties and which would not require a great deal of travel.

In determining child support, the court imputed to the mother the high salary of the job not taken. The result of this imputation was that child support was minimal, and, consequently, the mother was ordered to pay spousal support to the father.

The court of appeal reversed. This followed the same court’s ruling in In re Berger, 170 Cal. App. 4th 1070 (2009), where the issue of imputation of income was argued. In Berger, the wife appealed, asserting that the trial court was in error in not imputing income to a father whose monthly expenses exceeded $21,000 per month. Her two arguments were that the trial court should have imputed the income that (1) the father enjoyed prior to his voluntary decision to end his former job and start a new enterprise, and (2) the sums earned by the new business which the father was reinvesting in the new enterprise rather than taking as salary. It is important to note that the court of appeal denied the request to impute the income of his former employment. The court reversed only because the father was in sole control of the reinvestment of the income from the new employment, and the court found that the trial court should have considered his sole control over these funds.

In Berger, the court found that it would be improper to impute income a party had formerly earned in the absence of evidence demonstrating that he could still earn such an income if he were to return to that industry. The finding reminds us of In re Graham, 109 Cal. App. 4th 1321 (2003), which found that some actual evidence was necessary prior to the imputation of income.

In Ficke, there was no evidence that the mother’s pet healthcare membership insurance job was bringing in any great sums which she was reinvesting. The record suggests she actually had an income of only $251 a month from the new business. The trial court imputed the salary of the job she could have taken. After all, it was available and it would have meant more money available to help the children. But there was no express finding saying this.

In reversing, the court of appeal reminds us that in imputing income, there must be an express finding supported by substantial evidence that the imputation would benefit the children. The court cites In re Cheriton, 92 Cal. App. 4th 269 (2001), In re Mosley, 165 Cal. App. 4th 1375 (2008), and In re Cryer, 198 Cal. App. 4th 1039 (2011). However, while taking the other job would have made more money available, the mother would have also had to travel and be away from the children. It is questionable whether this would have been in their best interests.

There seems to be no case where a trial court imputed income to a party who was to pay spousal support. All cases where the court imputed income are child support cases.

What needs to be shown, then, in arguing to the court to impute income? The following four factors are determinative: (1) The party has the ability and opportunity to work, pursuant to In re Bardzik, 165 Cal. App. 4th 1291 (2008); (2) bad faith plays no part in the imputation, pursuant to In re Destein, 91 Cal. App. 4th 1385 (2001); (3) there is actual evidence of the job being available, pursuant to In re Cohn, 65 Cal. App. 4th 923 (1998); and (4) the imputation will benefit the children, pursuant to In re Cheriton and In re Ficke.

The mere showing that a party earned money before retiring is not sufficient evidence to impute income. See In re Bardzik, 165 Cal. App. 4th 1291 (2008). A mere finding that a job exists also is not sufficient. Evidence must show the job is there, available, and that it is in the children’s best interest.

There is another area, of course, where imputation is appropriate. Although Family Code section 4057.5 limits inclusion of the income of either parent’s new spouse or non-marital partner in setting child support, the statute provides for an exception. Where there are truly “extraordinary” circumstances, such as “where excluding that income would lead to extreme and severe hardship,” the inclusion is possible. The “extreme and severe hardship” must be as to the children of the relationship and not as to a parent. In such a case, the court must then also consider whether consideration of that income would cause severe hardship to any other child supported by one of the parties, or a severe hardship to the “new economic partner.” Family Code section 4057.5(b) provides that such an extraordinary case may include a parent who either (1) voluntarily or (2) intentionally quits work or (3) reduces income, or (4) who intentionally remains unemployed or underemployed and relies on a subsequent spouse’s income. In re Wood, 37 Cal. App. 4th 1059 (1995).

Taking a fresh look at the issue of imputing income reminds us of the constant changing nature of family law; it is important to stay abreast of the variations, interpretations, and intricacies of the field. From time to time a review of that which “everybody knows” is a worthwhile endeavor.

Commissioner Richard G. Vogl, a past editor of this magazine’s Family Law Corner column, and retiree after twenty-six years on the Family Law Panel of the Superior Court, is now a volunteer at the Legal Aid Society and a privately compensated private judge. He can be reached at RichVogl@gmail.com.